Country’s outlook brightens as Fitch upgrades credit rating

Upgrade signals global confidence in Pakistan’s reforms, says PM

STATE OF THE NATION

April 17, 2025

GLOBAL ratings agency Fitch has upgraded Pakistan’s foreign currency credit rating to ‘B-’ from ‘CCC+’, citing increased confidence in the country’s progress on narrowing its budget deficits.

The upgrade also reflects optimism about Pakistan’s ability to implement structural reforms and maintain performance under its International Monetary Fund (IMF) programme, Fitch stated.

According to Reuters, the agency noted that despite potential external pressures from ongoing global trade tensions, Pakistan’s limited reliance on exports and market-based financing should help mitigate associated risks.

Prime Minister Shehbaz Sharif welcomed the move, describing it as a reflection of Pakistan’s economic progress and the international community’s growing confidence in the country's economy. “Fitch has declared Pakistan’s economy stable. The improvement in our credit rating by an international agency reflects progress and reinforces global confidence in our economic direction,” he said, as reported by the Associated Press of Pakistan (APP).

Finance Minister Muhammad Aurangzeb described Fitch’s upgrade as a “strong expression of confidence” in the government's economic reforms and policy direction. He emphasised that the decision would strengthen the government’s agenda, encouraging increased trade, investment, employment, and industrial development.

“The government remains committed to continuing this journey towards economic stability and reform,” Aurangzeb added. He also projected that foreign remittances could reach a record $38 billion by the end of the 2024-25 fiscal year.

Highlighting recent achievements, the minister pointed to the success of the International Mineral Conference, calling it a milestone for Pakistan’s investment climate.

Recovery amid challenges

Pakistan’s economy had been under severe strain, teetering on the brink of default following a record spike in inflation in May 2023 and rapidly depleting foreign reserves. However, the situation stabilised, aided in part by a $7 billion IMF bailout. A new IMF agreement in March 2025 could unlock an additional $1.3 billion.

Fitch noted improvements in policy credibility, stating Pakistan performed well on quantitative performance benchmarks, especially in reserve accumulation and achieving a primary fiscal surplus, although tax revenues missed indicative targets.

Provincial governments have also passed legislation to increase agricultural income tax, marking progress on key structural benchmarks.

Fitch acknowledged that this performance followed the country’s solid execution under the previous, albeit temporary, IMF arrangement that expired in April 2024.

Narrowing deficits and lower debt

The ratings agency projects the budget deficit to narrow to 6% of GDP by the end of FY2024–25, and to approximately 5% in the medium term, compared to nearly 7% in FY24.

“Our FY25 forecast is conservative. We expect the primary surplus to more than double to over 2% of GDP,” the agency stated.

Shortfalls in tax collection — partly due to lower-than-expected inflation and imports — are likely to be offset by reduced government spending and stronger provincial surpluses.

Government debt fell from 75% of GDP in FY23 to 67% in FY24, with Fitch forecasting a gradual decline over the medium term due to tight fiscal policy, nominal GDP growth, and repricing of domestic debt at lower rates.

However, Fitch warned that the debt-to-GDP ratio could rise in FY25 due to easing inflation, remaining above the 'B' rating median of just over 50%.

The interest payment-to-revenue ratio is expected to decline but will remain high at 59% in FY25, significantly above the ‘B’ median of 13%, due to the country’s narrow tax base and high domestic borrowing.

Inflation eases, growth projected

Fitch anticipates CPI inflation to average 5% year-on-year in FY25 — down from over 20% during FY23–24 — thanks to fading base effects from previous energy price reforms. Inflation is expected to rise again to 8% in FY26, in line with recent trends in core urban inflation.

The State Bank of Pakistan (SBP) kept its policy rate steady at 12% in March, following an aggressive 1,000 basis-point cut between May 2024 and January 2025.

GDP growth is projected to reach 3% in FY25.

External position and reserves

Pakistan recorded a current account surplus of $700 million in the first eight months of FY25, supported by strong remittances and favourable import prices. While imports increased in early 2025, the agency expects external deficits to remain modest — below 1% of GDP in the coming years.

Fitch noted that some informal foreign exchange controls likely remain in place, despite market reforms initiated in 2023.

The SBP’s foreign exchange reserves rose to nearly $18 billion in March 2025, up from about $15 billion at the end of 2024 and under $8 billion in early 2023. However, Fitch acknowledged that net reserves remain low due to foreign deposits and swap arrangements, although it considers gross reserves the more meaningful measure of liquidity.

Funding challenges remain

Fitch estimated that Pakistan faces $8 billion in external debt maturities in FY25 and $9 billion in FY26, excluding $13 billion in bilateral loans and deposits that are typically rolled over. The next international bond maturity falls in September 2025.

The government secured $4 billion in financing during the first half of FY25 from multilateral and commercial sources and anticipates an additional $10 billion in the second half — of which $4 billion is expected from multilateral institutions and $5 billion from commercial loans, primarily from Chinese banks.

Fitch noted that while Pakistan has reduced its reliance on commercial borrowing, political will is essential to sustain reform momentum, cautioning that consensus may weaken over time.